- First-half revenue rises 24 per cent to £23.5mn
- Underlying cash profit up a third to £4.4mn
- Free cash flow (FCF) of £2.6mn
- Net leverage cut from 1.65 to 1.47 times cash profit
- Order book 35 per cent higher than the start of the year
Investors continue to show a high degree of caution in their valuation of Aim-traded Venture Life (VLG:30.5p), a developer, manufacturer and distributor of products for the self-care market. It’s unwarranted.
Strip out the £2.3mn maiden revenue contribution from the three HL Healthcare ear, nose and throat brands (Earol, EarolSwim and Sterinase) acquired in December 2022, and Venture’s own brands delivered single-digit underlying revenue growth. The performance was buoyed by 21 per cent higher combined revenue of £5.2mn from two of the three BBI Healthcare brands acquired in 2021: Balance Activ, the leading UK brand for the treatment of bacterial vaginosis; and Lift, a range of glucose gels, shots and chewable tablets. Moreover, sales of the Gelclair brand more than trebled to £1mn. The muco-adhesive oral rinse gel used for painful symptoms of oral mucositis (a side-effect of some cancer therapies) was acquired as part of the complementary acquisition of oncology support product company Helsinn in 2021.
True, the Dentyl mouthwash brand continues to underperform, so much so that Venture has reduced the carrying value of the asset from £4.3mn to £3.8mn. Dentyl’s domestic sales have been hit by aggressive promotional activity by larger rival Listerine, while overseas distribution partner Samarkand failed to record any sales in China. That contract is under review. However, the underperformance of Dentyl and a few other owned brands should not take the shine off a likely strong second-half performance, which is underpinned by a 35 per cent higher order book than at the start of the year, and double-digit sales growth in customer brands. I also feel that investors are overlooking the significant deleveraging of the group’s balance sheet.
Venture’s free cash flow generation underrated
In the first half, Venture delivered free cash flow (FCF) of £2.6mn from £4.8mn underlying cash flow from operations. The business has a seasonal second-half weighting, so, factoring in the strong order book, analysts at house broker Cavendish expect the group to deliver 16 per cent higher revenue of £27.3mn.
Importantly, they also expect the gross margin to improve by six percentage points to 43.4 per cent, reflecting several factors, including an unwinding of input costs procured at previously high prices, and the pass-through of inflationary price hikes to customers. On this basis, Venture could deliver second-half cash profit of £7.2mn, up 50 per cent on the first half, and second-half FCF of £4.2mn. It would slash net debt (ex-finance leases) from £15.5mn to £11.7mn, reducing leverage to one times the annual cash profit forecast.
Furthermore, analysts believe 2023 FCF of £6.8mn (5.4p) could rise to £8mn (6.3p) in 2024 to halve net debt to £5.3mn. The implication being a material transfer of the economic interest in the £39.2mn market capitalisation company from debt holders to shareholders. Indeed, the £10mn (8p a share) forecast deleveraging of the balance sheet equates to a quarter of Venture’s market capitalisation of £39mn.
Modestly rated
So, even if you only value the group on a modest multiple of five times cash profit to enterprise valuation, the de-gearing process combined with the forecast 14 per cent increase in cash profit to £13.2mn in 2024 supports a 50 per cent re-rating of the shares by the end of next year. The 20 per cent share price reversal since the 2022 annual results (‘A self-care specialist with a lot of potential’, 3 April 2023) is a buying opportunity.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
